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Caris & Co. analyst David Miller this morning reduced his rating on Dreamworks Animation to Average from Above Average.

"The core reason for the downgrade stems from no positive flow out of the studio system whatsoever on DWA’s prospects for either a renewed distribution deal with Viacom once that deal terminates, nor prospects for a deal with an alternate distributor such as Warner Bros., very surprising to us given DWA’s solid track record."

Miller notes that the company's current deal calls for Paramount to front Dreamworks $160 million to $175 million for prints and advertising, and then to be reimbursed from the gross, with Paramount taking an 8% distribution fee after that. The analyst explains that Dreamworks thinks Paramount should take 6%, rather than 8%. Viacom's view appears to be that too much overhead is being allocated to Dreamworks films - money that could used internally.

"So that begs the question – given DWA’s solid track record, why doesn’t DWA CEO Jeff Katzenberg walk down the Street to Warner, Universal, or Sony and cut a deal?" he asks. "This is where it gets somewhat mysterious, as all 3 of those studio arms have had shotty success (at best) with various forays into feature animation over the years. However, the fact that no deal with an alternative distributor has been announced by now concerns us, and leads us to believe that DWA may be seriously considering a self-distribution model, which would likely require some sort of capital raise, likely in the form of debt issuance."

Meanwhile, the analyst adds that he recently discovered that Brave, the next Disney/Pixar film, will be released just 2 weeks after Madagascar 3, the next Dreamworks film.

Miller cut is target on the stock to $20, from $23. "We want to be clear; this ratings change has nothing to do with the performance of DWA’s current offering Puss ‘n Boots, which is just now crossing the $200 million mark, halfway to our target of $400 million - not bad considering that 41 different countries have not yet even opened that film. Rather, concerns around how DWA will resolve its distribution dilemma, with residual worries around next year’s Pixar film as competition, force us into a lower rating. "